PPS Trading System by Curtis Arnold

Hi Nick,

I asked you a couple of weeks ago....

Have you done any statistical analysis of this on our market as methinks it may vary over time.

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Your reply was about how Arnold used shorter time frame triangles.

I've just had a re-read of the PPS book and found on page 45....

When I did the original research in 1987, I required the symmetrical triangles to be at least 10 days and no more than 50 days long

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He then stated that he "gravitated toward smaller, more compact patterns".

The 86.4% that broke in the direction of the trend, is in the "Notes from the research"

The compact triangles may not have the same results, I saw no mention of it. However his original research which does include the same type of symmetrical triangle length as Bulkowski, has vastly different results. I would presume that it is because the research periods were different. Plus Arnold was looking at Commodities while Bulkowski was looking at stocks.

This again begs the question, Have you, or for that matter anyone else, done this type of research on Australian stocks, before applying it to Australian stocks??

brty

I don't have a raw set of stats on 'what percentage break in the direction of the trend' or how the trade stats mount up according to his specific techniques. I have never used the 'apex' as a stop point but the 'traders trick' entry. This offers somewhat different stats. Using the 'traders trick' entry enables you to have a b/even stop in place (usually) if the triangle reverses at the old high. As a guide, winners are around the 38% mark, losers around 30% and b/even trades taking up the balance. The b/even quantity will depend on how tight you manage the stop. Arnold uses 2x R but using 1x can be more beneficial in my view, albeit causes some frustration at times.

MRC & Co said:

Great post Kauri! I agree, I think I would have only seen the successfull triangle if I went back through that chart! Never thought of it that way! Thanks!

Which indicator do you use to help you determine the breakout direction? I only add RSI (perhaps change to a stochastic to my chart) for some use (divergence) and to look for price action movements once in highly overbrought/oversold territory. Without trading on this alone ever, just using to help with picking the direction of the breakout.

As far as the false breakout, at least you only loose the small stop, whereas you pick up the much larger gain from the true breakout. I also read some traders use a certain % or # of bars, or at least wait until the breakout closes below the trendline to determine if the breakout is likely. However, realise this can reduce your profits as you dont catch as much of the breakout. Always one + for another -

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Triangles, rectangles, flags, pennants, dual inside days etc...all of them are pausing patterns whose most reliable use is to indicate when an established trend is about to resume.
No need for Stochastic or RSI or any other indicator to help you determine the breakout direction.
The direction of the trend preceding the pattern will tell you the breakout direction.

If an uptrend precedes the pattern, then the uptrend is likely to resume once price breaks above the pattern.
If a downtrend precedes the pattern, then the downtrend is likely to resume once price breaks below the pattern.

bunyip said:

Triangles, rectangles, flags, pennants, dual inside days etc...all of them are pausing patterns whose most reliable use is to indicate when an established trend is about to resume.
No need for Stochastic or RSI or any other indicator to help you determine the breakout direction.
The direction of the trend preceding the pattern will tell you the breakout direction.

If an uptrend precedes the pattern, then the uptrend is likely to resume once price breaks above the pattern.
If a downtrend precedes the pattern, then the downtrend is likely to resume once price breaks below the pattern.

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I actually find RSI divergence on double tops/bottoms on daily charts very helpful, when coupled with volume.

If riding a trend, not using RSI in the traditional sense, but if an uptrend, and RSI is overbought, once it crosses back from overbought territory, can give an indication the trend is coming to an end.

Same as these patterns with distribution or accumulation.

Don't use any of the indicators for scalping though, only when trying to ride longer trends, and only RSI.

MRC & Co said:

Don't use any of the indicators for scalping though, only when trying to ride longer trends, and only RSI.

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Just out of interest that wouldn't be because a certain BIG boy looking over your shoulder would frown upon you if you had too many squiggly lines on your charts would it?

Trembling Hand said:

Just out of interest that wouldn't be because a certain BIG boy looking over your shoulder would frown upon you if you had too many squiggly lines on your charts would it?

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ha ha, na, the big boys encourage us little minnows to use whatever we see fit, if we can make it work or if it will simply just add to our conviction.

I actually tried using RSI for quite some time, but it was terrible for me!

The direction of the trend preceding the pattern will tell you the breakout direction.

If an uptrend precedes the pattern, then the uptrend is likely to resume once price breaks above the pattern.
If a downtrend precedes the pattern, then the downtrend is likely to resume once price breaks below the pattern.

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Think you can be much more accurate than indicators by watching the testing,Range and volume within each bar in the pattern---whatever that pattern be..

MRC & Co said:

ha ha, na, the big boys encourage us little minnows to use whatever we see fit, if we can make it work or if it will simply just add to our conviction.

I actually tried using RSI for quite some time, but it was terrible for me!

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yeah I stuck an RSI on my intraday charts when I first made the shift to daytrading, quite like it for EOD trading so thought it might be worth a look. Think it lasted about 2 or 3 sessions before it was banished forever

professor_frink said:

yeah I stuck an RSI on my intraday charts when I first made the shift to daytrading, quite like it for EOD trading so thought it might be worth a look. Think it lasted about 2 or 3 sessions before it was banished forever

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ha ha, exact same, though I stuck with it for about 20 sessions!

MRC & Co said:

I actually find RSI divergence on double tops/bottoms on daily charts very helpful, when coupled with volume.

If riding a trend, not using RSI in the traditional sense, but if an uptrend, and RSI is overbought, once it crosses back from overbought territory, can give an indication the trend is coming to an end.

Same as these patterns with distribution or accumulation.

Don't use any of the indicators for scalping though, only when trying to ride longer trends, and only RSI.

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My experience with uptrending markets is that they make frequent temporary retracements during the life of the uptrend. These retracements show a brief loss of uptrend momentum, and momentum indicators like RSI will react to this by crossing down from overbought territory.
Then they'll cross back up into overbought again when/if the retracement ends and the uptrend resumes.
By falling down from the overbought zone during the retracements, RSI and Stochastic etc are alerting you to a potential buying opportunity, rather than signalling the probable end of the trend.
The best use I've found for indicators like RSI is to take their buy signals during uptrends, but ignore their sell signals. And take their sell signals during downtrends, but ignore their buy signals.
But these days I don't use indicators at all. I find them unnecessary. Rather than scan for RSI buy signals during uptrends, I scan for one or two consecutive lower closes during uptrends. This alerts me to when an uptrending stock or market is in the process of making a retracement against the trend.....a potential buying opportunity.
Also, I use chart patterns such as those outlined in the PPS system.
And during downtrends, I simply use the mirror image of the above to find opportunities to go short, or buy put options.

bunyip said:

These retracements show a brief loss of uptrend momentum, and momentum indicators like RSI will react to this by crossing down from overbought territory.
Then they'll cross back up into overbought again when/if the retracement ends and the uptrend resumes.

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Yes, so this signals it may be time to exit, trend may be finished.

As you say, when/if the trend resumes (break of a new downward trendline), then one could trade the next swing up.

I would personally rather just take portions of a trend, as opposed to trying to take the entire thing and give wider stops.

Though I must say, even my odd trade off daily charts these days, are more just feel and price action.

Everything, really comes down to your exact entries and exits and finding what works with those and in which timeframes IMO. Throw in a bit of MM and not much else matters.

tech/a said:

Think you can be much more accurate than indicators by watching the testing,Range and volume within each bar in the pattern---whatever that pattern be..

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More accurate than indicators? Indicators are based on price and are only reacting to what price is doing. The setting of an indicator governs how quickly or slowly it reacts to changes in price action. RSI on a setting of 30 will react too slowly to give accurate signals. Change the RSI setting to 2 and the indicator may now be too reactive to give reliable signals.
Watch the price or watch the indicator is the choice of the individual, as is the setting used for the indicator. I spent years experimenting with and using indicators. These days I find it simpler just to watch price.

Range of the bars.....yes, I take note of the ranges to some extent, but it goes without saying that the ranges will tend to be smallish during consolidation patterns like Rectangles and Triangles, particularly when we're talking about those short-lived, micro patterns that are the core of the PPS system. This is particularly true in the case of triangles, where price movement becomes increasingly constricted and congested as it moves in an ever-tightening range towards the apex of the triangle.

Volume....I never look at it. I don't look at it during the formation of the pattern, and I consider it a complete waste of time monitoring volume on the breakout from the pattern.
The breakouts from those tight consolidation patterns can be fast and furious, and I want to be in the trade the moment they start to happen.
Once the pattern forms I place my entry order just outside the pattern to catch the breakout as it occurs. This allows me to nail the bulk of the very large moves that sometimes occur on the actual breakout bar. I'm not interested in waiting until the end of the breakout bar, then checking the volume of that bar to help me decide whether or not to enter on the following bar. That's a sure way to miss out on the big breakout bar move.
The perfect place to buy a stock or market or call option is right at the beginning of a powerful upward move.
The perfect place to short a stock or market or buy a put option is right at the beginning of a powerful downward move.
This can be achieved by placing your entry order just outside the pattern so as to catch the breakout move as soon as it begins.

bunyip said:

More accurate than indicators? Indicators are based on price and are only reacting to what price is doing. The setting of an indicator governs how quickly or slowly it reacts to changes in price action. RSI on a setting of 30 will react too slowly to give accurate signals. Change the RSI setting to 2 and the indicator may now be too reactive to give reliable signals.
Watch the price or watch the indicator is the choice of the individual, as is the setting used for the indicator. I spent years experimenting with and using indicators. These days I find it simpler just to watch price.

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So we agree then

Range of the bars.....yes, I take note of the ranges to some extent, but it goes without saying that the ranges will tend to be smallish during consolidation patterns like Rectangles and Triangles, particularly when we're talking about those short-lived, micro patterns that are the core of the PPS system. This is particularly true in the case of triangles, where price movement becomes increasingly constricted and congested as it moves in an ever-tightening range towards the apex of the triangle.

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True and this is why the Volume component is very important. Is it supply or accumulation volume---you can tell you know!

Volume....I never look at it. I don't look at it during the formation of the pattern,

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Something then which you may consider along with the "Position of the pattern within the life of the current and immidate past moves.

and I consider it a complete waste of time monitoring volume on the breakout from the pattern.

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Why?
You can tell a great deal infact you can often see if the breakout is possibly false.

The breakouts from those tight consolidation patterns can be fast and furious, and I want to be in the trade the moment they start to happen.
Once the pattern forms I place my entry order just outside the pattern to catch the breakout as it occurs. This allows me to nail the bulk of the very large moves that sometimes occur on the actual breakout bar. I'm not interested in waiting until the end of the breakout bar, then checking the volume of that bar to help me decide whether or not to enter on the following bar.

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I certainly agree,but would it be benificial to have an idea wether you should be going long or short (If the vehical being traded can be traded both ways)
Reversals in continuation patterns can be more volitile and more profitable than those which comply. I'm not suggesting waiting for the breakout bar either.

That's a sure way to miss out on the big breakout bar move.
The perfect place to buy a stock or market or call option is right at the beginning of a powerful upward move.
The perfect place to short a stock or market or buy a put option is right at the beginning of a powerful downward move.
This can be achieved by placing your entry order just outside the pattern so as to catch the breakout move as soon as it begins.

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Dont disagree.
But you can add to your analysis as I have suggested.
You have "Presumed" I mean waiting for the breakout.
Not so much more can be seen within the pattern.
Throw me a couple prior to their move. If your interested.

MRC & Co said:

Yes, so this signals it may be time to exit, trend may be finished.

As you say, when/if the trend resumes (break of a new downward trendline), then one could trade the next swing up.

I would personally rather just take portions of a trend, as opposed to trying to take the entire thing and give wider stops.

Though I must say, even my odd trade off daily charts these days, are more just feel and price action.

Everything, really comes down to your exact entries and exits and finding what works with those and in which timeframes IMO. Throw in a bit of MM and not much else matters.

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Yes, the trend may be finished when a retracement causes RSI to move out of the overbought zone, but in most cases the retracement will be temporary and the trend will have further to run.

A longer term trend trader will argue that the big money is in the big trends, and the way to extract maximum profit from those big trends is to use the various retracements to pyramid his position. This is sound thinking.

A short term swing trader will argue against sitting through the retracements - he'll be in favour of taking small regular bites out of the trend before a retracement starts to erode his profits. This is also sound thinking.

Both methods work. Horses for courses.

bunyip said:

A longer term trend trader will argue that the big money is in the big trends, and the way to extract maximum profit from those big trends is to use the various retracements to pyramid his position. This is sound thinking.

A short term swing trader will argue against sitting through the retracements - he'll be in favour of taking small regular bites out of the trend before a retracement starts to erode his profits. This is also sound thinking.

Both methods work. Horses for courses.

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Exactly my point.

Catching longer-term trends is not my style, that's all.

With tighter stops, you can load up a lot more, and while you may not catch as much of the trend as far as price is concerned, your leverage can be increased dramatically. Buying the bottom of a box in an uptrend, rather than the breakout point etc.......

MRC & Co said:

Exactly my point.

Catching longer-term trends is not my style, that's all.

With tighter stops, you can load up a lot more, and while you may not catch as much of the trend as far as price is concerned, your leverage can be increased dramatically. Buying the bottom of a box in an uptrend, rather than the breakout point etc.......

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All good points---

Would there be a reason why you'd buy at the bottom of one Darvas setup and not another or would you buy everyone?
Can you identify the most likely bar to buy in the box at its bottom that would give you a better probability.
Are there some boxes youd avoid and why?

tech/a said:

All good points---

Would there be a reason why you'd buy at the bottom of one Darvas setup and not another or would you buy everyone?
Can you identify the most likely bar to buy in the box at its bottom that would give you a better probability.
Are there some boxes youd avoid and why?

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To be honest, it's complete and utter discretion.

Most of the time, it may just be a feel.

If I am going to buy the bottom of the box, I will want it established already. If it's testing the bottom of the box for the 3rd time, or perhaps even just the second time to establish the box parameters, and price grinds to a halt at the bottom, with little selling pressure coming in, or even if the bottom of the box is being defended by strong buying. Other times, I will just place a buy order at the bottom and try to be flicked in, if however, price actually legitimately comes down towards my limit order and looks like there are some decent sellers, then I will remove it. Other times though, I will wait for a false break out the bottom (get all the bulls out) and try buy that false break when it grinds to a halt (this is the hard part though, if I bought the bottom, I will usually be covering at the false break out, whereas this is where I should be buying, which throws you entirely out of your rythem).

Thing is, as it's all intraday, you don't get caught by the same kind of gaps, and risk is further reduced.

MRC

That where I think VSA can help.
Regardless of timeframe (to say 3 min in VERY liquid markets). Illiquid markets cannot be read with any accuracy.{Mind you a bar which is an outlier trading Millions of stock not normally seen can be read in lower timeframes.}

I see it all the time in many many patterns and in the lower time frames you do see a great deal of Box type support/resistance type patterns.

There are very often tell tale signs which will place you on the right side of a trade.During and even after your set in a position.

The key is in.
Where the consolidation is within the timeframe traded relative to trend.
The really high volume bars
The really low volume bars
The testing of highs and lows in the range.
The range of the bars
The position of the close.

The Key to continuation is
Where the breakout is within the timeframe traded relative to trend.
The Range of the bar
The volume of the next few bars
The way price/volume reacts to highs and any lows on pull backs in the next few bars.

As an example and NOT a trick or cocky question interested in your comments and others on this chart.
Click on chart to expand.

Id use an intraday example but the R/T software is at the office ---can do so on Monday.

I will have a go..... it is a low volume test of a support level (previous resistance level)...I expect it to fail ie go up. Or alternatively, it is a low volume retracement again, likely to reverse. My current sim trading on the ES would suggest that I am likely to be wrong.

I am v interested in VSA. Are there any good readable/practical books or home study courses available that people are aware of?

cheers

I would prefer to be short this set up but not from the entry on the next bar.
Better entry would of been 1/2 way into second last bar. That is my coin toss.